Solar Energy: A Lot More Government Cronyism Than Capitalism

This was an interesting post which I read regarding solar power costs decreasing.

This chart shows the drastic drop in solar energy cost. According to AllianceBernstein:

Exhibit 2 is the chart the solar industry has been working towards for 60 years. Solar is now – in the right conditions – cheaper than oil and Asian LNG on an MMBTU basis. Yes, we are using utility- scale solar costs in developing markets with lots of sun. But that describes the growth markets for global energy today. For these markets solar is just cheap, clean, convenient, reliable energy. And since it is a technology, it will get even cheaper over time. Fossil fuel extraction costs will keep rising. There is a massive global market for cheap energy and that market is oblivious to policy changes at the NDRC, MITI, the EU or the CPUC.

There’s a lot to unpack there, but basically, AllianceBernstein is saying that in certain parts of the world–and “in the right conditions” (more on this below)–solar energy is cheaper than LNG (liquid natural gas) in Asia and oil when measured in quantities of million BTUs or more in terms of the production. Yes, that is a lot of different conditions and requirements, but it is an interesting achievement for the solar industry, which has been the whipping post for quite some time due to massive taxpayer subsidies with little to show for it.

What are some of the takeaways from this interesting achievement?

1. The qualifier “in the right conditions” is really important in this analysis.

Solar energy really isn’t available in places like Siberia (sorry, Vlad). It needs to be harnessed in an area that gets a lot of sunlight. Those areas tend to be hot (or warmer than your typical four season climate) year-round. What many people may not know is that there is a paradox when it comes to photovoltaic solar cells:

Does temperature affect the amount of energy a solar panel receives?


Although the temperature doesn’t affect the amount of solar energy a solar panel receives, it does affect how much power you will get out of it. To make a long and complicated story short, as the solar panels get hotter, they will produce less power from the same amount of sunlight. Normally, electrons at rest (low energy) are excited by the sun (high energy), and the difference between their excited and rest energies is the potential difference (voltage) that you could ideally get from your solar panel. However, heat also excites electrons (when we heat something we are giving it energy), which raises the energy of the electrons at rest. (“warmer” electrons have more energy at rest than their “cold” counterparts.)

Wait. Photovoltaic cells, which need sunlight, which gets the cells hot, will slow down production of energy when they get too hot? That seems like a problem with the whole model. Now, of course, technology is constantly evolving and it is entirely possible that solar panel manufacturers will overcome this obstacle in the future. But this seems like a big problem for commercial viability of solar power in the near-term. This leads us to the second takeaway…

2. The cronyism is strong in the solar industry.

This tweet was brought to my attention, showing some “green energy” companies which have received federal taxpayer funds and have gone belly-up, or are in financial “distress.”

.@JonathanHoenig nice call re cronyism inherent to green energy. Tired of govt calling these "investments." #cashinin

— #Bossy Hank (@_Hank_Rearden_) April 5, 2014

I hate cronyism, regardless of the beneficiary. Taxpayer subsidies made to green energy companies “to end our dependence on foreign oil” are some of the worst examples of cronyism. Subsidy cannot suspend the laws of economics or thermodynamics. Throwing good money after bad will not create a solar cell that can work in the most extreme temperatures. In reality, subsidy likely destroys ingenuity. If profit is the motive of a corporation, getting “free money” from the taxpayer eliminates that motive because instead of working to get investors and lenders on board, the subsidized corporation just sticks its hand out to the government. The money is strings-free and if the company goes bankrupt (like Solyndra) by wasting the money received from the taxpayer, there are no consequences. On the other hand, if investors and lenders are the ones supplying capital, they will want to ensure a return on their investment and the company will have to perform or face consequences in a bankruptcy proceeding.

Also, for the record: tax breaks (the ability to deduct the cost of business) are not “taxpayer subsidies.” A subsidy is money given directly from the taxpayer (via the federal government as an intermediary) to a company. A tax deduction involves reducing a business’ income by the cost of doing business. In other words, a tax deduction involves the business’ own money, while a subsidy does not. Deductions are available to all businesses under our tax code. Subsidies distort the free market.

Speaking of market distortion…

3. The LNG market is distorted because America is not a global participant.

Asian LNG is really expensive, so stating that solar power has dipped below the cost of Asian LNG is not necessarily a fair or accurate comparison. Recently, the price per million BTUs for LNG in Asia hit $20.00. Compare this with the current “spot” price in the United States, which is well under $5.00 per million BTUs, as of the date of this post. In other words, solar power still costs four times as much as American LNG, assuming the AllianceBernstein analysis is accurate.

American companies have to apply for a license to export natural gas. With fracking, America is sitting on a large amount of natural gas that it could sell overseas at a higher cost than at home. These sales would generate more revenue for business, create more jobs, and bring in more tax revenue for the government. Seems like a pretty good proposition. Why won’t the government get moving on this?

Bottom line: Solar power is an interesting and exciting technology. Its viability is certainly something that should interest us all, since cheaper energy is a good thing for humans in general. However, the free market’s profit motive should be the guiding force when it comes to so-called “green energy.” Taxpayer subsidies, like other handouts, simply do not provide the incentives that profit does and usually have the reverse effect. Moreover, distorting the market leads to unintended consequences and inefficiencies which ought to be corrected.

As always, free markets are better markets.

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Lots of economic data will be released this week as earnings season continues. Look for retail sales and business inventories on Monday, store sales, consumer price index, and the Empire State Manufacturing Survey on Tuesday, Housing Starts on Wednesday, and Jobless Claims and the Philly Fed Survey on Thursday.

Have a great week, and a blessed Easter or Passover, if you’re celebrating either!